Traders in cryptocurrencies have long extolled the virtues of their market’s 24/7/365 nature.
Now, after a brutal week of sell-offs and flash crashes, some players are calling for what would have been unmentionable, if not unthinkable, even during the cryptocurrency market’s near-collapse in 2018 – “circuit breakers.”
These are automatic stoppages put in place should prices fall below specified levels. Implemented at stock exchanges after the “Black Monday” crash in 1987, circuit breakers are meant to essentially throw sand in the gears of a plummeting market.
Cryptocurrency markets have no such guardrails, which helps explain why, in a matter of a dozen minutes Thursday, bitcoin (BTC) endured a 21 percent crash. For the day, it lost 31.5 percent of its value.
By contrast, in the equity markets, stocks tumbled as well, but not nearly as much. When the New York Stock Exchange and the Nasdaq opened Thursday morning, trading halted almost immediately. That’s because the S&P 500 index opened more than 7 percent down from the previous day, triggering a “Level 1” circuit breaker. This marked the second time in a week trading curbs were imposed on the big U.S. equity exchanges; Tuesday saw circuit breakers triggered as well
(Circuit breakers were also set off on Sunday, when futures contracts on the Dow Jones Industrial Average dropped 5 percent after the Fed announced lower rates and $700 billion in bond purchases, and again on Monday.)
“Today’s price moves in crypto are a strong argument for industry-wide circuit breakers,” tweeted Multicoin Capital’s managing partner Tushar Jain on Thursday. “The crypto markets structurally broke today & leading exchanges need to work together to prevent a repeat.”
“The entire DeFi ecosystem almost died today. Several large market participants went bust,” he went on to tweet. “Many traders literally could not get money to the exchanges fast enough to trade due to blockchain congestion & the extreme volatility was then made worse.”
Cryptocurrencies’ long-term success depends on whether exchanges can chill volatility, according to Jain.
“If we just all need to accept that crypto can drop by 60%+ in a day that *severely* limits the usefulness of this tech,” he subsequently tweeted. “Exchanges’ incentives are aligned with market growth. If markets can drop 60%+ in a day, the addressable market for this tech is much smaller.”
Speed bumps
As it now stands in the U.S. stock markets, both Level 1 and Level 2 (at 13 percent down) curbs lead to a 15-minute halt in trading (provided they occur before 3:25 p.m.) on stock exchanges like the NYSE and Nasdaq.
A Level 3 circuit breaker (20 percent decline) stops stocks from trading for the rest of the day.
Commodity exchanges like the CME have slightly different levels and even have “limit up” circuit breakers that kick in when futures contracts on stock indices trade above 5 percent in pre-market or after-hours trading.
The levels have gotten more stringent since the 2008 financial crisis, but the gist remains the same: Give traders – and automated systems – time to process the onslaught of orders and cool off before making things worse in a panic.
There are even more intricate rules for individual stocks. And similar curbs are found on other exchanges all over the world.
In lieu of such trading curbs, all the crypto markets have to serve as speed bumps are the exchanges’ occasional failures to process heavy volume.
‘Insane theory’
Several major exchanges — save Coinbase and Bitstamp, prominently — were plagued by outages of some kind Thursday. Most notably, BitMEX was offline “for maintenance” for a total of one hour with a couple of outages during a day that saw hundreds of millions of dollars in liquidations.
Sam Bankman-Fried, CEO of Alameda Research and cryptocurrency derivatives exchange FTX, questioned the timing of BitMEX going offline just as bitcoin was taking one of its worst plunges in its 11-year history.
In a tweetstorm prefaced with “Insane theory of the day,” Bankman-Fried postulated that BitMEX purposely shut down briefly to stave off a complete collapse in bitcoin. Bitcoin “rallied without the gigantic sell wall of the BitMEX [liquidations],” he said.
Not allowing all the liquidations to take place and then going offline as bitcoin’s price made its way toward $3,700 removed a tidal wave of bitcoin hitting the market. That allowed prices to quickly rebound above $5,000 thus making liquidations unnecessary.
BitMEX denied that was its intention and fired back at Bankman-Fried.
“’Insane’ is right. Sam, you know better than to deal in this type of conspiracy theory, especially since you operate a platform in the space,” the company’s official Twitter account said. “There is no conceivable reason why a platform like BitMEX – which has operated for over 5 years and counting – would lower itself to the degree you proposed to avoid a situation for which it is already prepared.”
“Sorry for suggesting it!” Bankman-Fried apologized. “I think I’m a bit confused why you’re interpreting it so negatively though–I didn’t intend it that way at all.”
Yet, whether or not such outages were intentional is beside the point, because they served as de facto circuit breakers, according to Jain.
“It is clear that those exchanges going down helped prevent further market volatility and allowed the market to stabilize,” he told CoinDesk in an email.
Dreaming the impossible dream
And it may be the only way circuit breakers could ever be implemented in cryptocurrency markets, noted Larry Tabb, founder and research chairman at TABB Group.
On stock exchanges, the companies agree to list their shares on an exchange, which could then halt trading with the equivalent of a flick of the switch.
Not so with unregulated cryptocurrency trading, where hundreds of exchanges can all trade a similar asset like bitcoin and it’s fairly easy for individuals to transfer that asset from one exchange to another.
Putting in circuit breakers “would be hard given the heterogeneous nature of the crypto market,” Tabb said to CoinDesk in an email. “There isn’t one regulator (many aren’t regulated at all), there isn’t one protocol, nor one data consolidated data feed.”
“So even if you wanted to implement one – how would you do it?” he went on to muse. “What if exchange X tripped a breaker, how would Exchange A know and why would they stop trading? In fact, if X were to shut down, it would be in A’s best interest to stay open as the trading from X may migrate to A.”
(A few hours after emailing CoinDesk, TABB Group posted to its website that it was shutting down “effective immediately,” citing business challenges exacerbated by the coronavirus crisis.)
Internal debate
For the time being, at least, circuit breakers may not be put in place as policy but the debate will likely rage on, even within exchanges themselves.
“Circuit breakers can only be used on a fully monopolistic exchange,” tweeted Changpeng “CZ” Zhao, Binance’s CEO, in response to a Cointelegraph piece about circuit breakers. “Free market doesn’t work that way. #btc is traded on many exchanges.”
The Cointelegraph article cited a piece in Forbes explaining circuit breakers in stocks, specifically because it was linked by Catherine Coley.
“In crypto, the concept of circuit breakers is [mind-blowing],” she tweeted. “It’s good to be aware of how other markets (S&P 500) handle volatility and liquidity concerns.”
She closed her tweet with the hashtag “#EducateDontIntimidate”
Coley is the CEO of Binance U.S., the American subsidiary of Binance.
